While U.S. inflation has been low for the last several years, many experts still believe double-digit rates are on the horizon.
Between still-low interest rates, high spending, unfunded liabilities and constant money-printing, these advisors expect the government’s measures to catch up with the currency in the next 10 to 15 years. “I feel that with the national debt over $17 trillion, $80 billion printed per month and unfunded liabilities at over $126 trillion, at some point in the future that’s all got to have severe consequences,” said Randall Reinwasser, CFP with Solitude Canyon Investment Advisors.
For clients nearing the ends of their careers, the compounding effects of 20, 30 or even 40 or more years of inflation may severely impact their spending power in retirement. “Everyone should be worried about inflation, especially those in or approaching retirement,” said Dan McElwee, executive vice president at Ventura Wealth Management. “Central bankers around the globe have been focused on preventing deflation and have tried to create inflation by pumping liquidity into global markets. This happened at a time when the Baby Boomers, en masse, decided that they only wanted safe assets, pushing yields on those investments even lower.” Over the next decade, this combination of low yields and rising inflation could make it far more difficult for even well-to-do retirees to maintain their current living standards, he said.
Social Security Implications
Aside from its impacts on retirees’ assets and investments, rising inflation would also decrease the overall spending power they derive from Social Security. At roughly 1.5 percent, the cost of living adjustment already lags slightly behind inflation, and the recently proposed “chained” CPI would increase the gap even further. “Don’t count on the COLA to maintain your standard of living,” Reinwasser said.
Furthermore, inflation’s greatest impacts on retirees aren’t always reflected in the consumer price index. “One of the largest flaws with this figure is that it strips out both food and energy costs, two areas that compose a significant amount of a retiree’s budget,” said McElwee. “When asked, a retiree will tell you that food, energy and health care costs always go up and eat into their income on an ongoing basis.” While the CPI may grow to reflect rising prices on the goods and services wage earners typically buy, the COLA won’t accommodate the more rapid increases retirees may face.
Tips for Retirees
Fortunately, there are several measures retiring clients can take to hedge against inflation, and their strategies should largely depend on their risk tolerances. “Conservative investors need to weigh moving assets out of cash, CDs and money market funds, as they are essentially wasting assets,” said McElwee. “Investors with higher risk tolerances need to consider the impact that rising interest rates will have on fixed income positions.”
Personal views on future inflation will also impact investment strategies, though less-than-optimistic advisors tend to see gold as a solid choice for most clients. “I think it’s irresponsible for advisors not to have any gold in their clients’ portfolios,” according to Reinwasser. He advises investors to put at least 5 percent into gold, though more pessimistic clients may devote as much as 20 percent of their assets to precious metals. “There’s no guarantee that gold will do well in a future inflation environment,” he adds, “but I’d take my chances.”
Ultimately, all retirees will need to take some steps to maintain their living standards, even if the inflation rate doesn’t significantly rise. To that end, Reinwasser also recommends that clients allocate 40 percent to 50 percent of their assets to stocks, which historically outpace inflation. At just 3 percent, a $50,000-per-year budget will rise to $67,000 in 10 years and $90,000 in 20 years. Even without a drastic rise in inflation, relying on cash and low-yield investments is a losing strategy for a generation looking forward to decades-long retirements.